This is my first post, and I would like to thank everyone on this board for helping other investors. I have learned a lot over the years reading many posts here. It is by far the best investment forum, and I appreciate the fact that it is non-political.

I started investing in late 90s when I opened an account at Waterhouse, which later became TD Ameritrade. All my investments are in Vanguard ETFs. 2 years ago, I opened solo 401k at Fidelity, for increased flexibility compared to SEP IRA. All new periodic contributions go to Fidelity, with annual IRA deposit to TDA. Vanguard ETFs are commission-free at TDA, and have been at Fidelity as well (they gave me some free trades which I only use occasionally for purchases - I don't trade and I re-balance with new contributions only).

I have read many books over the years, and many posts here, and I am sorry to say I honestly do not know the answer to this question: all else being equal - zero commission, same ER, same Vanguard fund/ETF, no trading - is MF better than ETF? I understand there is bid-ask-spread, but my purchases are few and infrequent being self-employed. In other words, would I be better off moving my TDA accounts to Vanguard just so I could exchange ETFs for Admiral MFs with the same ER? Is the dividend payment any different on say total bond mutual fund than on total bond ETF? I don't mind one-time move if it results even in small savings over time, but don't want to move just for the sake of moving to Vanguard.

My second question has to do with Fidelity. They are an excellent choice for solo 401k for many reasons, so I am not moving that account. They have now lowered ER on Spartan funds to match ER of Vanguard admiral funds and ETFs. So my question is this: do I continue using free trades to buy Vanguard ETFs (BND, VTI, VXUS - your basic 3-fund portfolio), or am I better off buying their Spartan funds? Their international does not have small cap, so I may continue buying VXUS as long as I have free trades, but the bond and total stock indexes seem to be identical to Vanguard admiral funds. So again, same question as before: is one better off long term in (Fidelity) mutual fund vs. (Vanguard) ETF?

I understand that the differences, if any, are minimal, and that this is just fine-tuning. I am looking for real-world experience of actual investors who held both MF and ETF over time and can tell the difference one way or another. The problem with books and articles written by Malkiel, Boggle etc. is that they generally recommend MFs over ETFs for average investor who is prone to trading, paying commissions etc., none of which applies in my case.

It seems to me that YOU have real-world experience with both ETFs and mutual funds. Or are you saying you have never owned mutual fund shares in your life?

I have held both kinds for a long time. With mutual funds you can buy/sell/exchange when the market is closed and still get a fair price. MF have settlement at T+1, while ETFs are at T+3. With mutual funds you can buy in dollar amounts and get fractional shares. You cannot do that with ETFs. With mutual funds you can set up automatic investing or withdraws from your checking account with a specific dollar amount. That's pretty hard to do with ETFs since most places would not allow you to buy/sell fractional ETF shares.

I find there are advantages to using TDAmeritrade, Fidelity, WellsFargo, and Vanguard rather than have everything in one place.

With automatic reinvesting of dividends MF and ETFs are different. With MFs, there is no friction. With ETFs, the broker decides how do the reinvesting and at what price, so sometimes you win and sometimes you lose with respect to the value the MF investor gets.

Many folks on this forum do not like ETFs because they cannot figure out how to set a limit order or have some kind of anxiety attack when they do so. Or they cannot submit an order when the market is open because they do not have access to a phone or computer at work. Since you are experienced with ETFs, I don't see that as an issue for you.

Last edited by livesoft on Thu Jan 31, 2013 4:03 pm, edited 1 time in total.

There is very little difference in holding Vanguard ETFs vs Mutual Funds for a long time. Mutual Funds are a tad simpler to invest in overall, but ETFs do have some advantages. If the expenses are the same, the returns will be basically the same, unless there is a change in the premium/discount between when you bought and when you sold. Certain ETFs that are very attractive due to purchase/redemption fees or lack of Admiral Shares (for the mutual fund) trade at a premium to NAV due to strong demand for the ETF share class (e.g. VSS, VNQI). This does not apply to BND and VTI, but VXUS does trade at a slight premium currently. Regardless, over a long period of time that effect is negligible - and hard to predict anyhow.

I have never owned mutual fund in my life, therefore I do not have experience with it. I started "investing" in 1998 in individual stocks. You can only imagine how that went. It was a good, early and relatively inexpensive lesson, so by 2001 I went to indexes (I did not want to pay ER for active funds). Since I did not really understand mutual funds, I bought ETFs instead. I became bogglehead without knowing such term existed... Never moved my account elsewhere. Free commissions was a nice gift a few years back, so there really is no incentive for me to move now.

I keep reading, especially on this site, how Vanguard's Admiral shares are the best index investing vehicle. So I just want to be sure I am not missing anything by remaining in Vanguard ETFs, and potentially going with Fidelity Spartan MFs. I am comfortable with ETFs, but am not emotionally attached to them. If there is a gain by moving ETFs to admiral funds, I will do it.

The only variable I can think of is how and when the dividends are reinvested. It takes about 2-3 days longer for dividends to be paid and reinvested at TDA vs. at Fidelity. I don't control purchase time and price, but than I don't have that control with MF either. Is MF dividend reinvestment better for investor? Maybe that is the question, I am not sure.

The point about slight premium is a good one, I just don't know how meaningful it really is long term. Sometimes there is a discount. Sometimes you get lucky on a midday purchase below closing price. It may all even out long term. I was just hoping for real-life evidence, real numbers, that prove/disprove MF is better than ETF.

I am also inclined to invest into Spartan funds, to reward Fidelity for providing absolutely awesome customer service with my solo 401k. There is no premium in ER over Vanguard ETFs anymore, I just don't know if the funds themselves are every bit as good as those from Vanguard.

Get a quote for VTSAX (Vanguard TSM Admiral). Then click on "Growth of 10K." Then, in the "Compare to Symbol" box, type in (one at a time) VTI and FSTMX. Remove the curves for "Large Blend" and "S&P 500" by clicking the "X" that appears when you hover over their names in the Legend.

What remains is a comparison of the three funds - extend the comparison out to 10 years, and they might as well be one line. You will be fine with any of these options. Everything else we discussed is basically noise and personal preference.

It's all pretty obvious, there are no hidden subtleties that make one vehicle far better than the other, it's small matters of convenient, personal preferences, and costs which depend on what you're buying and the fee structure for mutual funds and ETFs at your brokerage, and you can do the math as well as anyone.

The mysteries of bid/asked spread are unfathomable--but tiny for the sorts of ETFs most Bogleheads are interested in.

The Fidelity Spartan funds are fine. If you are as happy with Fidelity as you say you are, I would give them serious consideration.

ETFs have been wildly overhyped for various reasons. Here are my guesses as to what those reasons might be. First, they give much wider scope for "traders," so understandably traders like them better. Second, they are apparently fairly easy to launch and all sorts of "innovative" ETFS have sprung up that give retail investors "access to" bizarre asset classes, something for people to write about. Third, some advisors like to sell clients on the idea of letting them manage a portfolio of index ETFs rather than letting a mutual fund manager manage a mutual fund, i.e. the advisor gets the management fees instead of some mutual fund manager.

1) Vanguard ETFs are a share class of Vanguard funds with Admiral Share pricing. It is the exact same pot of money. They pay the same dividends also, only paid on different pay days. It will make no difference. Do what is easiest for you.

2) It is really splitting hairs between buying Vanguard ETFs or Fidelity Spartan index funds. No one can really say which is better or worse. IMO, it will make no difference. Do what is easiest for you.

Rick Ferri

Choose a few low-cost index funds in different asset classes, rebalance occasionally and forgetaboutit!

Thanks for your suggestion, kenyan. Yes, I am very familiar with Morningstar. I have done those comparisons many times over the years. It will always be a single line, whether you put in investor or admiral class share or ETF. However, when given a choice, investor will always choose admiral over investor shares because of a measurable lower ER, even though the chart on Morningstar will look identical. So I was just wondering, since I never invested in MFs, whether there is any measurable difference between admiral shares MF, and ETF with identical ER. I have read on this site and many others over the years that, for example, total bond MF is almost always cheaper than it's ETF counterpart with identical ER because of how the dividends are paid, but I never saw real numbers over the long term to confirm that statement.

That's why I asked this in my original post:

"I understand that the differences, if any, are minimal, and that this is just fine-tuning. I am looking for real-world experience of actual investors who held both MF and ETF over time and can tell the difference one way or another."

It appears, based on the responses so far, that there really is no measurable difference. I really appreciate the time all of you took to respond to my question.

I'm not comparing apples to apples here as I am comparing different holdings, but in my limited experience, one of my family members has had Short Term Capital Distributions via Fidelity MF (not Spartans) and I never had any with my Vanguard ETFs. But we were investing in different indexes with different focuses, so I can't say that the investments were fundamentally equivalent to give an accurate picture.

So in the case of the Op (I have the same question myself), which is a better choice? Are there any tax-efficiencies to ETFs being held in a taxable account versus MF? From this site, I cannot seem to find data to say yes, but other sites like to mention that ETFs are tax-efficient. Well, I guess that's a sign as well as I'm ignoring other things from the other sites and I'm on here seeking advice!

Nisiprius,Yes, I read this book from Rick, as well as All About Asset Allocation. I liked them both very much, he is a very good writer and you are very fortunate to have him contribute on this forum. I also read The Random Walk some time ago, which was an eye opener for me, and just about every investment book out there since than. It's what put me on the right path, and so I am very comfortable with my AA and investment choices. But almost every time I read one of those books, the message was "ETFs are good if used responsibly, but MFs are better overall". I have been thinking about it for several years, since on paper the two are identical.

livesoft,thanks for the link, this is exactly what I am talking about! I read this thread and many others, and I quote your own words: Many folks have said over and over again: "Do not use ETFs for bond funds." And so that's the message I get, but being a numbers guy, I am looking for long term, real life evidence to support that statement. That's why I turned to this board and asked the question. Based on all the responses so far, it appears there is no difference.

snowman wrote:In other words, would I be better off moving my TDA accounts to Vanguard just so I could exchange ETFs for Admiral MFs with the same ER? Is the dividend payment any different on say total bond mutual fund than on total bond ETF?

I wouldn't. I know because my non-401(k) holdings are mostly Vanguard ETFs. You can't convert ETFs to mutual funds without it being a taxable event, so any that are in taxable accounts might have capital gains tax due.

snowman wrote:In other words, would I be better off moving my TDA accounts to Vanguard just so I could exchange ETFs for Admiral MFs with the same ER? Is the dividend payment any different on say total bond mutual fund than on total bond ETF?

I wouldn't. I know because my non-401(k) holdings are mostly Vanguard ETFs. You can't convert ETFs to mutual funds without it being a taxable event, so any that are in taxable accounts might have capital gains tax due.

Brian

I love how the Wiki (http://www.bogleheads.org/wiki/Exchange_Traded_Funds) explains the other direction can be done. You can convert mutual funds to the ETF if you have the account at Vanguard and a VBS account. Guess it would be used and abused if it also went the other way around.

snowman wrote:It's all in tax advantaged accounts, so taxes are a non-issue. I was looking strictly at ongoing expense.

My preference is ETFs, as you have increased flexibility. A number of brokerages are offering bonuses for moving assets. You couldn't do that with Admiral funds. Whether that matters to you or not is for you to decide.

Good point, Brian. I have been tempted by those offers for a few years now.

There is also another case to be made for greater flexibility of ETFs: being self-employed, solo 401k offers somewhat higher level of protection from creditors than IRA. I can always move IRA accounts there, if necessary, and keep my preferred investment vehicles.

I have also found that both TDA and Fidelity are very nice and accommodating to me. They probably know I could leave if I wanted to, so they provide good customer service and freebies. To me that's worth something.